Testing the factors that determine the profitability of banks with a dynamic approach: Evidence from Turkey

Abstract

The present study aims to identify the internal and external factors that affect the profitability of the banks operating in Turkey. For this purpose, the study used data from 23 public, private, and foreign banks, covering period from 2007 to 2020. Two dependent variables were used as profitability indicators of banks. These are “Return on Equity” (ROE) and “Return on Assets” (ROA). In order to increase the reliability of the models developed during the study Dynamic Generalized Method of Moments (GMM) and Fixed Effect Model (FEM) were applied. Results of the analysis indicated a positive and statistically significant relation between inflation rate and GDP growth rate, and ROA and ROE. According to the results of GMM, there was a positive relation between ROA and ROE, and 1-year and 2-year lagged ROA and ROE. This situation may be explained by the fact that profits acquired in Turkish banking sector are steady. ROA and ROE were observed to have a positive relation with inflation rate and economic growth rate. In other words, the increase in inflation rate and GDP growth rate positively affect profitability of public, private and foreign banks.

Keywords

• bank profitability
• turkish banking
• dynamic approach